Skype: The eBay Item Worth $2 Billion

Auction giant spinning off Internet phone service

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A Rhode Island town was trying to make money by selling extra items, but it did not own what it sold a Connecticut man.

Updated at 10:37 AM PDT on Wednesday, Sep 2, 2009

eBay, the San Jose-based online-auctions giant, is trading two-thirds of the Internet phone service Skype for about $2 billion, reversing a 2005 acquisition that many analysts considered a head scratcher from the beginning.

It's really a reversal: Among the private funds buying a 65 percent stake in the business from eBay is Index Ventures, a venture-capital firm which backed Skype as a startup and profited nicely from the original sale of the company.

Silver Lake Capital, a private-equity firm famous for tech buyouts like that of hard-drive maker Seagate, led the deal, in which eBay sold a 65 percent stake in the business to a group of private investment funds for $1.9 billion in cash and a $125 million note, while retaining a 35 percent stake.

Besides Index and Silver, the group of investors includes Andreessen Horowitz, the new $300 million fund set up by Web browser pioneer Marc Andreessen, and the Canada Pension Plan Investment Board.

Former eBay executive Josh Silverman will lead the new firm. His record as a businessman is mixed: Despite success at eBay, his involvement in managing eBay's stake in Craigslist helped sour relations between the two companies, according to a legal filing by Craigslist last year.

eBay said earlier this year that it would spin off Skype, which provides voice and video connections via the Internet, after struggling to justify its 2005 acquisition of the company for $2.6 billion.

Former CEO Meg Whitman was inspired to do the deal, she has said, by Chinese e-commerce services which used Internet voice calls to build trust among buyers and sellers. eBay hoped users of its auction site would adopt Skype, but it never became popular on the service. It took a $900 million writedown on Skype in 2007, tacitly acknowledging it had overvalued the business.

Ironically, thanks to that lowered valuation, eBay may now book a profit on the deal, which it expects to close in the fourth quarter of this year.

Shares in the San Jose-based company climbed 44 cents, or 2 percent, to $22.58 in morning trading Tuesday.